EUROPE-WIDE Trends and Developments Contributed by: Munshya Mupela, Semra Altıntaş, Shirley Li and Joyce Lo, TPA Global
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DEMPE Court Cases in Europe: How Courts Allocate Revenues From Intangibles Author: Munshya Mupela As tax authorities increase their scrutiny of cross- border intellectual property (IP) structures, European courts are increasingly at the centre of disputes over how revenues related to intangibles should be allo - cated among entities within multinational groups. A recurring theme across judgments is that legal IP ownership alone no longer determines entitlement to returns. Instead, courts look at the underlying DEMPE functions – development, enhancement, maintenance, protection and exploitation – to determine which enti - ties truly create and control the intangible value. This section of this Trends and Developments article reviews major European cases, focusing on Sweden and Italy, and places them within the broader global trend of DEMPE-based judicial reasoning. The analy - sis relies on the DEMPE framework in Chapter VI of the 2022 OECD Transfer Pricing Guidelines and cases summarised in the TPA Global DEMPE Handbook. Who performs and controls the DEMPE functions connected to valuable intangibles? At the heart of DEMPE litigation lies a simple yet far- reaching question: How would a court assess the reward linked to your intangibles? Courts have become sceptical of transfer pricing models that are built around paper ownership or contractual allocations that do not match economic behaviour.
To guide this analysis, courts tend to focus on five key checkpoints: • control over DEMPE decisions; • people and capabilities performing and overseeing DEMPE; • risk assumption and control; • funding and financial capacity; and • conduct versus contracts. Failure across these checkpoints may lead to a real - location of intangible-related returns. Sweden: royalty payments to a Maltese IP owner One of the clearest European examples of DEMPE reasoning comes from Sweden. In this case, a Swed - ish operating company (“SwedishCo”) paid a 3% royalty to a Maltese group IP company (“MaltaCo”) for the use of intangibles. However, when audited, the Swedish Tax Agency denied the deduction, chal - lenging whether MaltaCo performed any real DEMPE activities. According to the case summary, MaltaCo performed no DEMPE functions – it held IP on paper but lacked people, control, or decision-making capacity. It neither developed nor enhanced nor protected the intangible assets in question. Court’s view The court concluded that legal ownership alone does not entitle the holder to returns. Because MaltaCo “did not perform or control the DEMPE functions related to the intangible”, the royalty lacked economic basis and could be denied for tax purposes.
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